“Too big to fail.” It was the term du jour in the depths of the financial crisis, and became a pejorative label for greedy, inefficient or lazy institutions that exist because of sheer size alone.

Banks were deemed too big to fail amid global financial chaos as credit markets seized up in 2008. Then Detroit automakers apparently were too big to fail in 2009, lest the American manufacturing sector be erased forever. And now troubled eurozone states like Greece and Italy are too big to fail, lest the entire EU be splintered asunder.

Will we ever be free of the TBTF phenomenon? The sad reality: probably not.

But that doesn’t mean we can’t ensure the cases are much fewer and have much less fallout on the American taxpayer.

Problems of Perception and Deep Pockets

Part of the challenge is perception. It seems that “too big to fail” entities never are identified as such in happier times, because the concept of failure isn’t imminent and few enjoy speculating about doomsday scenarios.

Take Greece as a prime example. At an abstract level, surely everyone always has known that the default of a EU member state would be disastrous for the economic union … but few people considered it a real possibility for Greece. Until the events in 2008 and 2009, of course. And by then it was too late.

The simple answer to this is to learn from the lessons of the past and not let our guard down. In the case of the 2008 financial meltdown and TBTF banks, the Federal Reserve mandated “stress tests” for the major financial institutions in America and has continued to monitor liquidity threats to prevent another credit crisis.

Of course, all this does is prevent a repeat of 2008. Who knows what new and different crisis the world will face in the future.

Another issue is the practical challenge of wearing down a TBTF entity, even when there is a legitimate complaint. Any organization that becomes too big to fail will naturally have a host of political connections, media sycophants and public relation slimeballs willing to protect the moneyed interests of their corporate overlords.

Call me a pessimist, but I don’t imagine any organization that reaches that kind of scale would go without a long, painful and costly fight.

There Are No ‘Free Markets’

But perhaps the biggest head-scratcher is the serious philosophical conflict between two core ideals of capitalism: that successful companies deserve to grow and prosper on the merit of their business without interference, and unfortunate businesses that can’t adapt should justly fail and fall away thanks to their shortcomings.

Except all that touchy-feely stuff about “free markets” rarely turns out to be true.

We all should agree that some regulations are necessary for the pubic good. Surely nobody thinks it an affront to capitalism that FDA rules prevent drug companies from selling sawdust as cancer cures. And surely nobody thinks that it’s acceptable for two or three major players in an industry to engage in price-fixing to gouge consumers.

Heck, even China understands that monopolies are ultimately bad for the national economy as well as normal citizens. Despite a pretty ugly record on business corruption and human rights, even Beijing admits it’s bad to allow businesses to do whatever they please.

The trouble is, of course, that the costs and benefits of most regulations are far from clear-cut, and balancing competing interests is a complicated affair.

Consider the Volcker rule. On one hand, preventing banks to invest their capital as they see fit could be seen as an overly burdensome overreach of regulators. On the other, as illustrated by the financial crisis of 2008 — and most recently the multi-billion trading losses at JPMorgan Chase (NYSE:JPM) — there is something to be said for protecting financial institutions from themselves.

Or take the higher capital requirements for global banks known as “Basel III,” which will start to take effect worldwide in 2013. Requiring banks to sit on more of their cash and lend less will cut off some borrowers and limit economic activity; however, permitting financial institutions to take big risks without having a safety cushion of some kind admittedly is the height of folly.